Preserving Wealth After an IPO or Liquidity Event

For the lucky few who manage to work at—or start—the right company at the right time, a big wealth creation event—an IPO, a merger, an acquisition, or other liquidity event—is a once in a lifetime happening. (For an even luckier few, lightning may strike twice or three times.) It’s important to realize early on—before the event—the ramifications of what you do with an equity award.

Buy and hold? Sell? Do nothing? Each choice has a potential upside and downside that may not be apparent for months or years into the future. It’s best to identify what you’ll do before the event, when you are calm and rational, instead of waiting until after the IPO euphoria and madness. Emotions can be a dangerous thing when planning for your financial future.

Keeping up with the Joneses is tempting, too, especially when you are surrounded by conspicuous consumption. Hearing stories about successes among their peers, many people involved in a liquidity event feel entitled to act out on their enthusiasm—right away—sometimes leading to hubristic, even tragic consequences.

On the other hand, fear of doing something “stupid”—either by buying something crazy like an expensive mini-mansion with high maintenance costs or making a losing investment—is often the catalyst to hold onto IPO shares longer than necessary. This isn’t so much a strategy as an avoidance technique that can cost upside in the long term. The counterintuitive reality is that in many cases, the more conservative move is to begin selling a large portion of your shares or stock options as soon as the lockup period ends. You’ll still have some left to ride up (assuming you’re willing to take a chance), but you can use the sales proceeds to make smart, diversified investments that can help you meet your long-term goals.

Still others, who perhaps don’t feel they deserve such a financial windfall, or simply aren’t comfortable spending so much time and energy focusing on their finances, also avoid taking any action at all until it’s too late. One three-time IPO veteran offers this wisdom: “My advice to anybody involved in a startup company is the minute you have liquidity, sell half. It’s not a vote of confidence against the company to diversify. If you don’t, and the stock goes down—and I’ve watched many, many of my friends let it ride down to zero—you’re going to feel terrible. And if it goes up, you still have that other half to ride up, but you also have your nest egg.”

One notable exception where inaction played out well is Google, whose stock has been a huge success. Google is one of the few examples of a company whose stock price went up after the IPO in August 2004 and has stayed up going on 8 years. But Google is an exception. (And the past is no guarantee of future performance.)

The solution to the challenge of preserving wealth can be as simple as planning ahead and being mindful of your goals. For most people, the idea is not to accumulate a specific dollar amount, but instead to achieve what’s best for them and their family. A wealth planner who has your best interest in mind—who is your personal CFO to help you enjoy life, plan wisely, and make smart financial decisions—can be key to securing your financial future.

One successful executive said about the fees she pays her advisor, “I don’t look at it as an expense. I see it as an investment in my future.”